Note E — Stock-Based Compensation Plans

The Paychex, Inc. 2002 Stock Incentive Plan, as last amended and restated effective October 15, 2020 (the “2002 Plan”), authorizes grants of up to 46.5 million shares of the Company’s common stock. As of May 31, 2023, there were 14.2 million shares available for future grants under the 2002 Plan.

All stock-based awards to employees are recognized as compensation costs in the consolidated financial statements based on their fair values measured as of the date of grant. These costs are recognized as an expense in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the requisite service period and an increase in additional paid-in capital.

Stock-based compensation expense was $62.6 million, $52.8 million, and $52.5 million for fiscal years 2023, 2022, and 2021, respectively. Related income tax benefits recognized were $12.1 million, $9.8 million, and $8.6 million for the respective fiscal years.

As of May 31, 2023, the total unrecognized compensation cost related to all unvested stock-based awards was $97.5 million and is expected to be recognized over a weighted-average period of 2.7 years.

Black-Scholes fair value assumptions: The fair value of stock option grants was estimated at the date of grant using a Black-Scholes option pricing model. The weighted-average assumptions used for valuation under the Black-Scholes option pricing model are as follows:

Risk-free interest rates are yields for zero coupon U.S. Treasury notes maturing approximately at the end of the expected option life. The estimated volatility factor is based on a combination of historical volatility, using stock prices over a period equal to the expected option life, and implied market volatility. The expected option life is based on historical exercise behavior.

Stock options: Stock options entitle the holder to purchase, at the end of the vesting term, a specified number of shares of Paychex common stock at an exercise price per share equal to the closing market price of the common stock on the date of grant. All stock options have a contractual life of ten years from the date of the grant and a vesting schedule as established by the Board of Directors (the “Board”). The Company issues new shares of common stock to satisfy stock option exercises. Stock option grants to executives and outside directors are typically approved by the Board in July. Grants of stock options to executives vest one-third per annum. Grants to members of the Board vest after one year. Vesting is generally achieved on these dates with active employment or participation as a member of the Board on the date of vesting.

Restricted Stock Units (“RSUs”): The Board grants RSUs to certain executive and non-executive employees and outside directors. An RSU is an agreement to issue shares at the time of vesting with no associated exercise cost for the recipient. For each unit granted, the holder will receive one share of Paychex common stock at the time of vesting. If the recipient does not vest in the shares due to leaving Paychex, all shares or units of RSUs, and any dividends accrued thereon, when applicable, will be forfeited and returned to the Company.

Time-based RSUs: Time-based RSUs granted to executives vest one-third per annum over three years. Time-based RSUs granted to non-executives, during fiscal 2023, vest on a graded basis over a four- or five-year period. Time-based RSUs granted to non-executives, prior to fiscal 2023, vest one-fifth per annum over five years. Time-based RSUs granted to outside directors vest on the one year anniversary of the grant date. Vesting is generally achieved on these dates with active employment or participation as a member of the Board on the date of vesting. The fair value of time-based RSUs is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the vesting period. Time-based RSUs may, or may not, earn dividend equivalents depending on the terms of the specific grant.

Performance-based RSUs: Performance-based RSUs primarily have a two year performance period, after which the number of underlying RSUs earned will be determined based on achievement against pre-established performance targets. The RSUs earned are then subject to a one year service period. Performance-based RSUs do not earn dividend equivalents during the performance period. The fair value of the RSUs is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the performance period.

Restricted stock awards: The Board approved grants of restricted stock awards to the Company’s executives and outside directors prior to fiscal 2023. All shares underlying awards of restricted stock are restricted in that they are not transferable until they vest. Recipients of the restricted stock earn dividends, which are paid to the recipient at the time the awards vest. If the recipient does not vest in the shares due to leaving Paychex, all shares of restricted stock, and the dividends accrued thereon, when applicable, will be forfeited and returned to the Company.

Time-based restricted stock awards: Time-based restricted stock awards granted to executives vest one-third per annum. Time-based restricted stock awards granted to outside directors vest on the one year anniversary of the grant date. Vesting is generally achieved on these dates with active employment or participation as a member of the Board on the date of vesting. The fair value of time-based restricted stock awards is equal to the closing market price of the underlying common stock as of the date of grant.

Performance-based restricted stock awards: Performance-based restricted stock awards primarily have a two year performance period, after which the number of shares earned will be determined based on achievement against pre-established performance targets. The restricted shares earned are then subject to a one year service period. Performance-based shares do not earn dividend equivalents during the performance period. The fair value of performance-based shares is equal to the closing market price of the underlying common stock as of the date of grant, adjusted for the present value of expected dividends over the performance period.

Long-term Incentive Plan (“LTIP”): In July 2016, the Board approved an LTIP award comprised of both performance-based non-qualified stock options and performance-based restricted stock awards. This award was granted to executives down to the vice president level with vesting dependent on achievement against long-term strategic and financial objectives. Total stock options and restricted shares earned were based on achievement against pre-established targets for fiscal 2020, which vested in fiscal 2021.

Non-compensatory employee benefit plan: The Company offers a qualified Employee Stock Purchase Plan (“ESPP”) to all employees. The Company’s common stock can be purchased through a payroll deduction at a discount to the market price. The qualified ESPP allows for a discount of up to 15% based on the sole discretion of the committee established to administer the plan. For offering periods during fiscal years 2023, 2022, and 2021 the discount was set at 5% of the market price. Transactions under the non-qualified ESPP occurred directly through the Company’s transfer agent and no brokerage fees were charged to employees. Transactions under the qualified ESPP occur through the Company’s third-party stock plan administrator. The plans have been deemed non-compensatory and therefore, no stock-based compensation costs have been recognized for fiscal years 2023, 2022, or 2021 related to the plan.